30% UPI market share cap rule does not apply to Paytm, Jio; here's why

India's flagship payments processor, the National Payments Corp of India (NPCI), on Thursday said third-party payments apps, from January 1 will not be allowed to process more than 30% of the total volume of transactions on state-backed United Payments Interface (UPI) framework, which facilitates seamless peer-to-peer money transfers.

The move will likely stymie the growth of payments services offered by Facebook, Alphabet's Google and Walmart, while boosting the likes of Reliance's Jio Payments Bank and SoftBank backed Paytm, which are armed with bank permits.

The new caps do not apply to Reliance's Jio Payments Bank, or to Paytm, because of their payments banking licenses and they do not fall into the "third-party apps" category.

Companies such as PhonePe and Google, which currently exceed NPCI's stipulated cap, will get two years to comply with the new rules.

"This announcement has come as a surprise and has implications for hundreds of millions of users who use UPI for their daily payments and could impact the further adoption of UPI and the end goal of financial inclusion," Sajith Sivanandan, Business Head at Google Pay, India, said in a statement.

The new rules came as NPCI finally granted Facebook approval to launch WhatsApp payments in India, clearing a limited rollout of the service to 20 million users.

While the long-delayed approval is a reprieve for Facebook, the limited rollout thwarts WhatsApp push into payments in its largest market with over 400 million users.

Ram Rastogi, a digital payments strategist and former NPCI executive, said NPCI's move to cap transactions for each third-party payments providers would foster healthy competition.

"If just two technology service providers (PhonePe and Google Pay) are capturing about 80% of the market share then it poses systemic risks and NPCI's move to put a limit is aimed at correcting that," Rastogi said.

The move to limit some players comes at a time when Google already is coming under intense scrutiny in India, where it faces at least four major antitrust challenges.

The restrictions are also expected to help regulators limit any potential cybersecurity threats.

"It is important that there is more competition which makes the space less vulnerable and leads to better controls," said Abizer Diwanji, EY's India head for financial services.

(With Reuters inputs)